WALL Street firms’ $18 billion in year-end bonuses sparked much outrage. But for New Yorkers, the real issue is that bonuses fell more than 40 percent from the year before, translating to $1 billion less in tax revenue for the state.

Few citizens (or even lawmakers) understand New York’s reliance on Wall Street as the engine of its economy. Though the local financial-services industry has seen little employment growth over the last 30 years, by 2007 it produced 20 percent of state revenue, up from 5 percent in 1980.

Even after the US economy recovers, Wall Street will likely remain permanently scarred by the last year. Sooner or later, the state will have to adjust to the new realities by lowering its expectations for revenue from this sector.

Some argue that the solution is to raise taxes on the “rich.” If only it were so simple. The top-earning 1 percent of taxpayers now pay almost 40 percent of state taxes. And these people are very mobile – they’ll increasingly respond to higher rates by leaving the state.

Others wait for a “stimulus” bailout. But a year or two of federal windfalls won’t make up for the permanent hole that Wall Street’s woes leave in the state budget.

Still others offer schemes like more gambling. But New York’s tried all those “solutions” these last 40 years; they’ve never worked.

The only rational response to permanently lowered tax revenue is to make New York state a less expensive place to live, run a business and raise a family. With state and local taxes already some 50 percent above the national average, there should be plenty of opportunity to lower or restrain these costs. Here are eight ways to do it:

1) Cap local school property taxes. Limit their growth to 4 percent a year or the inflation rate, whichever is lower. Over the next five years, such a cap would save taxpayers hundreds of millions.

2) Repeal or reform laws that raise costs for local governments with no benefit to taxpayers. These include laws on construction of public buildings and negotiation of contracts with public employees.

3) Dedicate cash from the sales tax on gasoline to road and transit improvements. This would direct more than $600 million in new funding for needed infrastructure, without imposing new debt.

Give patients more information about their health providers and allow more flexibility in insurance design to increase competition and drive down costs. And stop subsidizing hospitals and other institutions that are doomed to fail anyway.

5) Simplify the state income-tax code. Replace today’s cumbersome, confusing system with a two-bracket “flat tax,” generating the same revenue with less bureaucracy and dramatically lower compliance costs for taxpayers.

6) Pension reform. Institute a new pension tier, similar to that which existed before 2000, for all new governmental employees. Within five years, this change would save taxpayers hundreds of millions and still provide a generous and secure pension to public workers. And end loopholes that let public workers pad retirement income by including overtime in the pension calculation.

7) Reform environmental-review and zoning laws. Streamline the procedures that make commercial development so hard – and make it easier to establish home businesses.

8) Simplify school-district administra tion. Consolidation at the county level of functions like transportation, health insurance, food service, etc. could save hundreds of millions a year.

These proposals won’t solve all of New York’s problems. But this crisis requires dramatic changes in the status quo. Together, these reforms will save billions for our state’s hard-pressed families and businesses – and the lowered cost of government will create hundreds of thousands of new private-sector jobs.

Our state is an economic basket case, but still has great potential for renewal – if we make the right choices. Delaying needed reform will inevitably bring further decay and the exodus of our most productive citizens. The time to act is now.

John J. Faso, the New York GOP candi date for governor in 2006, is now a partner at Manatt, Phelps & Phillips, LLP.